Investing in shares: Long term investing vrs market timing
There is a common saying that goes, “Don’t judge a book by its cover”. Some valid words of wisdom for investors could be, “Don’t judge a stock or share by its current price movement”.
Despite several cautions against hasty decisions, many investors still incorrectly ask, “Which share is currently doing well on the market?” What they mean is that which share price is going up so they can buy and enjoy immediate capital gain. This misconceived notion can lead investors down the wrong path, and help them make bad decisions with their money.
If you were to ask 10 staff in Ghana Cocoa Board (Cocobod) what long term investing meant to them, you might get 10 different answers. Some may say 10 to 20 years, while others may consider five years to be a long term investment, others may even consider one year to be long term. Individuals like Cudjoe might have a shorter concept of long term, while institutions like Cocobod may perceive long term to mean a term far out in the future. This variation can lead to variable investment styles.
The general consensus among investors is that long term assets should not be needed in the three to five year range. This offers a cushion of time to allow for markets correction.
However, what is even more important than how you define long term is how you design the strategy you use to make long-term investments. Investors have different styles of investing, but they can be grouped into active management and passive management. Passive management is a buy-and-hold strategy in which the investor select securities or funds to hold them long term.
On the opposite side of the spectrum, numerous active management techniques allow you to shuffle assets allocations around in an attempt to increase overall returns.
The trouble with this strategy is that your timing must be close to perfect because by the time the average investor is aware of top performing shares, they are looking at last year’s winner. The gains have happened already! The folks that made big money did it last year, last quarter or even last week.
It doesn’t take long before the investment is overpriced, overvalued and headed downhill. It’s precisely the wise time to sell, but generally a foolish time to buy. Unfortunately, it’s precisely the time far too many investors send their one Ghana Cedi in the wrong direction, buying an investment that is unlikely to repeat its past performance anytime soon.
Even when a few lucky investors do manage to grab on to the tail end of a trend, the strategy of chasing performance usually ends badly. For the most part, these investors are too greedy to sell and lock in their profits. They hold the investment as long as the price is going up and continue to hold it on the way back down and when the sun is down they can get hurt.
There’s absolutely no doubt that some investment managers beat their benchmarks. Some even manage the task for prolonged periods of time. Notwithstanding this, even the Oracle of Omaha has down years. It is simply unrealistic to expect that any investment or any strategy will always deliver positive performance. Bearing this in mind, it goes without saying that a bad year does not reflect a bad strategy necessarily.
Market conditions change all the time. Factors beyond an individual company’s control such as the credit crunch, power rationing can cause temporal setbacks. In the long term, these setbacks are just a flash in the pan and not a reason to abandon a successful investment.
There is however, a strategy that combines a little active management with the passive style. A simple way to look at this combination of strategies is to think of a backyard garden. While you may plant different crops for different results, you will always take the time to cultivate the crops to ensure a successful harvest. Similarly, a portfolio can be cultivated along the way without taking on a time consuming or potentially risky active strategy. Set a long term goal and then choose a strategy that has a high likelihood of achieving that goal. Make logical goals, not emotional reactions. Think about inflation and don’t count on cash to appreciate at a greater rate. Rely on the time tested theories of diversification and low-cost investing to help over the long haul.
Although the best investors and traders understand the importance of patience, it is one of the most difficult skills to learn as an investor and trader. Dennis Gartman, a successful trader on Wall Street and publisher of the Gartman Letter has this to say about the value of patience: “Proper patience is needed throughout the lifecycle of the trade, at entry, while holding and exit”.
The stock market is designed to transfer money from the active to the patient. The best returns come from those who wait for the best opportunity to show itself before making a commitment. Remain active in your analysis, look for quality companies at discounted prices and be patient waiting for them to reach their discounted price before buying. You need temperament that neither derives great pleasure from being with the crowd or against it. Independent thinking and having confidence in what you believe is much more important than being the smartest person in the market.
Most of the time, the best opportunities are found when everyone else has given up on the stock market. Overconfidence and emotion are the enemies of a high quality portfolio
While much is written on this topic, let’s keep it simple. Basically, it is risk-reward decision. The more you commit, the greater the possible reward and the higher the risk of losing some of that money. However, if you don’t play, then you cannot win. When the best opportunities present themselves, it is usually wise, to make a significant commitment. For good but not great opportunities, committing smaller amounts makes sense as potential reward is less. As in poker, most of an investor’s money is made in small increments with the occasional big win coming along every once in a while. This requires that an investor evaluate each opportunity compared to others that have shown themselves in the past. Experience is an excellent teacher.
Take advantage of the long term trend when planning your investment strategy. Accept that your portfolio won’t always be in the “right” place at the “right” time, and that you won’t always own the “hot chick”. Instead of acting like an amateur teenager chasing the latest “babes” in town plan your investment like a matured man looking for a wife.
Although many people manage to build sizeable amounts of wealth by jumping from one “hot” strategy to another, the odds are against you if you try to follow in their footstep.
One wrong move and you suffer irreparable damage. In the long-run, buying and holding a value stock, just like marrying a good woman, and sticking to her, will probably leave you at least well-off, if not better, and it sure is a lot less stressful!
Credit: Isaac A. Boamah